Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill
Commentary on the Bill
Hon Michael Woodhouse
Minister of Revenue
First published in August 2016by Policy and Strategy, Inland Revenue, PO Box 2198, Wellington 6140.
Taxation (Business Tax, Exchange of Information, and Remedial Matters) Bill; Commentary on
the Bill.
ISBN978-0-478-42435-5
CONTENTS
Provisional tax: accounting income method
Overview
AIM providers approval and revocation
AIM-capable accounting system
AIM approach eligibility criteria
Determinations
Payment dates
Refunds
Providing data to Inland Revenue – the Statement of Activity
Interest and penalties
Tax pooling
Transfers of overpaid provisional tax
Other business tax
Safe harbour for all provisional taxpayers using standard uplift method
Changes to UOMI safe harbour threshold
Provisional tax attribution
Allowing contractors to elect their own withholding rate
Extending withholding to labour-hire firm contractors
Voluntary withholding agreements
Late payment penalty
Disclosing reportable unpaid tax to credit reporting agencies
Information sharing with the Registrar of Companies
Motor vehicle expenditure of close companies
Increased threshold for taxpayer self-corrections of minor errors
Simplified calculation of deductions for dual use vehicles and premises
Remove the requirement to renew RWT exemption certificates annually
Increased threshold for annual FBT returns from $500,000 to $1 million of PAYE/ESCT
Modifying the 63-day rule on employee remuneration
Automatic exchange of information
Foreign trust disclosure rules
Design of START
Administration of the late payment penalty rules
Amending the rules for new and increased assessments by the Commissioner
Use-of-money interest and transfers of tax
Other policy matters
Collecting tax on employee share schemes using the PAYE system – technical clarifications
Student loan drafting amendment
Provisional tax: accounting income method
Overview
(Clauses 27 to 54)
The bill proposes a new method of paying provisional tax – the accounting income method (AIM).
Background
There are currently three methods for calculating provisional tax: the standard uplift, estimate and GST ratio methods. The proposed AIM is not replacing these methods; it introduces a fourth method. Most businesses meet their income tax liability by paying provisional tax in three instalments throughout the year. Use-of-money interest (UOMI) is charged as if income was earned evenly over an income year, which is not realistic for many taxpayers. Feedback to Inland Revenue has focused on the inflexibility of provisional tax and its lack of integration with the natural rhythms of running a business. The current dates for payment are independent of when income is earned, which does not work well for businesses with fluctuating incomes and tight budgets. New businesses benefit from not having to pay provisional tax in their first year of business but often struggle with making payments in their second year.
This proposed new measure was announced by the Government in Budget 2016 as part of a package focused on tax reform for small businesses. The package is designed to provide certainty and reduce compliance costs.
A growing number of small businesses are using accounting software. The introduction of AIM will offer software providers an incentive to extend the capability of their products to include the consideration of tax-related issues during the year rather than waiting for a year-end review.
Using upgraded software that includes income tax information would enable businesses to consider their tax adjustments throughout the year and seek input from their tax advisor at any time, rather than just at year-end. This would provide businesses with better visibility of their tax liability during the year. New businesses would be able to start paying tax when they start making a profit, educating them about, and supporting them to meet, their tax obligations in their first two years in business. There would be no tax surprise for them in their second year of business.
Proposed approach
Inland Revenue has previously worked with software providers to enable GST returns to be filed from accounting software. This has simplified meeting tax obligations and reduced the amount of time that businesses spend on compliance. AIM is another step in integrating tax into business processes.
Inland Revenue would continue to work with tax agents to ensure that their involvement in the reform of provisional tax, and in particular, the proposed AIM approach, continues. Their involvement in developing any proposed changes would ensure a practical perspective on the design of AIM and its use in business.
It is expected that it will take time for taxpayers to feel confident in using a new proposed provisional tax method. It is expected that the accuracy of payments made will gradually improve as corrections made at year-end are captured in software and flow through to future years, reducing the error rate.
What using AIM will mean for businesses
Under the proposed changes, provisional tax would be integrated into business processes and payment amounts would be based on current year tax-adjusted income. Businesses using AIM would have more certainty they are paying the right amount of tax as it will be paid as income is earned. This would increase businesses’ confidence in their financial position at any particular time.
For those who keep their accounting packages up to date, calculating a business’s provisional tax liability during the year would not require any significant additional work for businesses and their advisors. For those who currently leave most of their tax calculation until year-end, AIM would require more consideration of adjustments during the year; this should, however, be offset by a reduced year-end workload. The calculation of income tax would become integrated into the general operation of business accounts.
An AIM-capable software system must have a way of flagging entries or sending communication to a third party (usually the tax agent). This is not a compulsory review point but rather ensures there is always a way for the tax agent to stay involved in the process. The extent of the relationship between the taxpayer and their tax agent is at their discretion.
The following graphic shows how the AIM proposal would work for a business.
The following examples illustrate how the proposed AIM would apply.
Example 1
Murphy Cliffe has recently finished a painting apprenticeship and intends to set up his own house painting business. He has no previous business knowledge and his parents suggest he meet with their accountant to get some advice. The accountant suggests Murphy sets up a company, starts using a basic accounting software package and elects into paying provisional tax using the AIM approach to help him budget in his first year of business. Murphy’s company has a March balance date and will pay GST and provisional tax using the AIM approach on a two-monthly basis. Murphy does not make any profit in the first few months due to his set-up costs, but starts to make a profit towards the end of the year. He will pay provisional tax as follows:
GST & provisional tax payment dates / 28-Jun2018 / 28-Aug
2018 / 28-Oct
2018 / 15-Jan
2019 / 28-Feb
2019 / 7-May
2019 / Total
prov tax / Terminal tax due
Income earned during current year / Nil / Nil / Nil / 20,000 / 30,000 / 50,000 / 28,000
Implied tax on taxable income / Nil / Nil / Nil / 5,600 / 8,400 / 14,000 / 328,000 / Nil
AIM will help Murphy budget for tax correctly in his first year of operation as he pays tax as he earns income. He decides to wait before he buys a new vehicle for his business.
If Murphy had decided against using AIM, he would have paid no provisional tax in his first year of operation and had his business continued into its second year, his tax payment schedule for his first and second year[1] would be as follows:
GST & provisional tax payment dates / 28-Aug2018 / 15-Jan
2019 / 7-May
2019 / Total
prov tax / Prov tax 1
28-Aug
2019 / Prov tax 2
15-Jan
2020 / Prior year
terminal
tax due
April 2020 / Prov tax 3
7-May
2020
First year of business / no provisional tax due in first year of business
Tax due in second year of business / Nil / Nil / Nil / Nil / 9,800 / 9,800 / 28,000 / 9,800
Unless Murphy had budgeted carefully he may not have set the right amount aside for his terminal tax due in the second year in one lump sum. He instead bought a new vehicle for his business. In his second year of operation his terminal tax from his first year of $28,000 falls due and he also has to pay his provisional tax payments for his second year of $9,800 each. If Murphy had not set the appropriate amount aside in his first year of business he may struggle to meet this payment schedule and his business could fail.
.
Example 2
Benson Electrical Ltd is considering the use of AIM in their existing business. They currently use accounting software, pay GST every two months, and have a March balance date. Their accountant talks to them about using AIM due to the unpredictable nature of the contracts they are being awarded. The inability to plan in the past has resulted in exposure to use-of-money interest. They generally have a slow start to the financial year but business picks up in the latter half. Their business is steadily growing and their residual income tax is $180,000 in 2017 and $220,000 in 2018.
They ask their accountant to show them what their provisional tax liability would look like under different methods for the 2019 year and how exposure to use-of-money interest would differ.
In this scenario, their possible use-of-money interest[2] costs range between nil and $6,594.
Provisional tax payment dates / 28-Jun / 28-Aug / 28-Oct / 15-Jan / 28-Feb / 7-May / Totalprov tax
Income earned during current year / 108,000 / Nil / 178,000 / 250,000 / 178,000 / 143,000
Implied tax on taxable income / 30,240 / Nil / 49,840 / 70,000 / 49,840 / 40,040 / 239,960
Provisional tax methods and due dates for payment / 28-Jun / 28-Aug / 28-Oct / 15-Jan / 28-Feb / 7-May / Total
prov tax / Terminal tax due / UOMI incurred
AIM / 30,240 / 0 / 49,840 / 70,000 / 49,840 / 40,040 / 239,960 / 0 / 0
Uplift 105% / 77,000 / 77,000 / 77,000 / 231,000 / 8,960 / 682
Uplift 110% / 66,000 / 66,000 / 66,000 / 198,000 / 41,960 / 3,194
Estimate / 40,000 / 60,000 / 90,000 / 190,000 / 49,960 / 6,594
Uplift/Estimate switch / 63,000 / 63,000 / 130,000 / 256,000 / -16,040 / 224
Proposed approach
To date, Inland Revenue has worked with representatives of the software and accounting industry in developing AIM to test concepts and identify opportunities. Their role was to help officials understand software capabilities and use by small businesses and identify opportunities for reducing businesses’ compliance costs. Statistical and market data was provided by software providers to help Inland Revenue prepare its advice to Government. (Inland Revenue was not provided with access to the data or business systems of individual businesses only summarised and anonymous information was used in the development of this policy.)
Since April 2016, there has been extensive consultation on the technical details of the AIM proposals through written submissions, an online forum and workshops with small business owners, accountants and interested software providers.
In the upcoming year, it is proposed Inland Revenue would continue to work with interested software providers on incorporating AIM into their products.
Inland Revenue will continue to work with members of the accounting profession to provide a practical perspective on the design of AIM and its proposed use in business.
It is proposed that Inland Revenue drafts a technical Determination in relation to the changes proposed in the bill. This reflects the fact that AIM is first and foremost a tax collection method. Its provisional tax natures implies it is not a year-to-date method requiring exact tax liabilities to be calculated on a regular basis, but it does need to ensure reasonably accurate amounts of tax are collected during the year. For this reason, it is proposed that AIM requires a series of adjustments to calculate the amounts of provisional tax due. The proposed Determination would also outline what technical adjustments must be made within the software.
Having these technical matters contained in a Determination that all software providers must adhere to, would ensure commonality of treatment across different software products. A working group comprising representatives from the accounting and software professions, small business representatives and officials would develop these proposed Determinations. This will ensure the adjustments and information requirements are practical, relevant and as simple as possible, and that the software remains intuitive and effective to use. The proposed technical Determination is discussed in more detail later.
AIM providers approval and revocation
(Clauses 40 and 44)
Summary of proposed amendments
The bill proposes a process of self-certification through statutory declaration before a software provider can offer a product that is deemed AIM-capable.
Application date
The proposed amendments will apply for the 2018–19 and later income years.
Key features
Proposed new section 15U of the Tax Administration Act 1994 states that AIM providers should apply to the Commissioner of Inland Revenue for approval for their AIM-capable accounting systems. The term approved “AIM provider” is proposed as a new defined term in section YA 1 of the Income Tax Act 2007. The Commissioner will approve the AIM provider,taking into consideration the integrity of the tax system, and the AIM provider will supply the Commissioner with a statutory declaration outlining the product, a commitment to regular updating and any other information the Commissioner has set out as required.
Providers can apply with a product that would either deliver AIM to businesses with gross income below $5 million a year or for a defined class of taxpayers who have gross income over $5 million a year.
New sections 15V and 15W of the Tax Administration Act 1994 state the Commissioner may revoke the above approval, after consultation with the AIM provider. It is proposed this would happen when the statutory declaration is held to be untrue and revoking the approval would positively affect the integrity of the tax system. The revocation would not take effect until the following tax year. An AIM provider may also notify the Commissioner of its choice to revoke. This would take effect in the following tax year and must be immediately communicated to all end-users of the AIM provider’s products.
New section 15X of the Tax Administration Act 1994 states the Commissioner may publish a notice regarding approvals or revocation if she chooses.
Detailed analysis
Self-certification is considered to be the most effective method of approving AIM providers. There are likely to be a large number of parties interested in providing AIM capacity, and consideration has been given to whether Inland Revenue would audit each software provider that applied. Possible issues with resourcing constraints and the negative business implications of delays in receiving Inland Revenue approval have resulted in self-certification being a more effective choice. It also reflects a long-term view of how Inland Revenue will engage and work with third parties in the future.
New section 15U of the Tax Administration Act 1994 states that AIM providers would need to apply to the Commissioner for approval for their AIM-capable accounting systems.
The Commissioner would approve the AIM provider with consideration to the integrity of the tax system, and the AIM provider themselves. Once the Commissioner was satisfied on these grounds, the AIM provider must supply the Commissioner with a written statutory declaration.
The statutory declaration would include an outline of the product itself, a commitment to keeping it updated, and any other information the Commissioner sets out as required. This information would be likely to relate to the technical aspects of AIM both in terms of tax policy and software requirements. The details of the declaration would be clearly outlined in the Technical Determination proposed in clause 46 (discussed later) and proposed to be released by Inland Revenue in early 2017.
A statutory declaration is a legal document which allows a person to declare something to be true for the purposes of satisfying a legal requirement. In this way statutory declarations are similar to affidavits. It is a crime under the Crimes Act 1961 (punishable by a term of imprisonment not exceeding three years) for a person to make a statutory declaration that is misleading or false. The specific procedure for making statutory declarations, coupled with the fact that false declarations can lead to imprisonment, give statutory declarations a special status.
New sections 15V and 15W of the Tax Administration Act 1994 state that the Commissioner may revoke an approval. It is proposed this would happen when the statutory declaration is held to be untrue and revocation would protect the integrity of the tax system.
The Commissioner would consult with a software provider before a revocation took effect, to give both parties a chance to work through any concerns and, where possible, remedy them. A revocation could be reversed by the Commissioner before it takes effect if the circumstances that gave rise to the revocation were remedied. This might occur when a provider accidently fails in one of its obligations (if, for example, it missed a minor tax update).
The revocation would not take effect until the following tax year, to allow taxpayers using the software to finish the income year, and not disadvantage them in any way.
If an AIM provider no longer wished to provide AIM capability through their software, they must notify the Commissioner. Revocation would take effect in the following tax year and must be immediately communicated to all users of the AIM provider’s products.
If a software provider had to cease business suddenly, the Commissioner would work with the affected taxpayers to ensure the integrity of the tax system was maintained.